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The Tide Has Turned And These Charts Predict The Next Stop
Submitted by Thad Beversdorf via FirstRebuttal.com,
What we saw with the latest GDP reports is something truly remarkable. A market that was explicitly told the past 4 years of economic growth had been overstated simply shrugged off the news. That is, absolutely no price recalibration took place. This really evidences beyond any doubt that there is no relationship between the economy and the market. It further evidences the Fed’s increased proficiency in directly guiding the market.
Now I know this is not shocking to many of us. But to watch the market’s blatant irreverence toward a report that, with the flip of a switch, removed 12% of the presumed economic growth from the past 4 years did strike me as remarkable. It shows that the printing of economic indicators is nothing but theater. There is absolutely no rational market explanation that the market traded flat to up on the day when current GDP missed estimates and the past 4 years of growth was adjusted downward, all in the midst of one of the worst seasons for YoY deteriorating corporate revenues/earnings.
But more realistically what it suggests is the only player left in the market is the ‘buyer of last resort’, i.e. the Fed and its minion entities. Certainly nobody wants to aggressively short the market in the face of a clear long only strategy by the Fed, but just as certainly no major money managers are longing this market. Volume has simply dried up.
I’ve been writing for almost a year now about the economic cannibalism that has been feeding earnings growth. I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal. And well we are now seeing the indications that the growth through contraction has now hit its inevitable end. Have a look at the following chart which is really the only chart one needs to study at this point. The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line).
I have normalized the parametres back to the early 1990’s so that we can better understand the absurdity of what’s been taking place. Now there is a tremendous amount of information we can pull out of this chart so stay with me here.
The initial observation is that the past 25 years has been a series of large bubbles and subsequent busts, at least in both the price level and adjusted eps of the S&P. Focusing on the price level we see the normalized index having two similar peaks and now into a third peak quite substantially higher than the previous two. The first two peaks top out around 400 on the index and each subsequent reset price was down around 220. Now one might expect that the sources of these two very similar bubbles were thus the same. But one would be wrong.
Notice in the first bubble that adjusted EPS topped out around 275 whereas in the second bubble they reached 450. We often hear that because of this phenomenon equities were far more overvalued in the tech bubble than in the credit bubble. While the conclusion is correct it creates a strawman analogy for this third and current bubble. Specifically, that because current price to earnings is similar to that of the credit bubble that equities are fairly priced or at least relative to the tech bubble. But this argument is a strawman fallacy.
The tech bubble was a bubble of massive direct capital allocation stupidity. The credit bubble was a bubble of massive indirect capital allocation stupidity. What I mean by that is the tech bubble was created by absurd capital injections directly into the secondary market (bypassing earnings), driving stock valuations to the moon. The credit bubble was done via flooding consumers with debt which was used to prop up personal consumption which led to growth in revenues, earnings and thus stock valuations. You can see a large increase of revenues per share between 2001 and 2007. Now revenue growth is supposed to lead earnings growth which in turn pushes up stock valuations. However, when revenue growth is driven by debt consumption it is temporary. And we all learned that cold, hard fact in 2008.
But so the argument that EPS is the figure one needs to pay attention to really misses the actual driving force which is revenue based earnings growth. The above chart depicts that while EPS has been rising significantly for the past 7 years, revenues have been absolutely flat. And so what we have is earnings growth pushing stock valuations massively higher but without the consumer onboard. Very different from the credit bubble. How does this happen?
Well again, stock valuations are being pushed higher through another temporary effect. EPS growth is coming by way of operational contraction and financial engineering – meaning dividend payouts and share buybacks. This is evident in the following chart of just this latest bubble that depicts growth in stock valuations relative to growth in revenue per share, which have (notably) declined since Aug 08 (the base period).
Now EPS growth from anything other than earned consumption, meaning consumption from income rather than debt can only be temporary. (One arguable exception would be if EPS growth came from productivity, however, we see in this first chart that productivity is flat and so not the driver of EPS growth.) And if the EPS growth is temporary it follows that the stock valuations that have grown on the back of EPS growth too is temporary. What we are about to find and already are seeing the signs of with major technical supports breaking down is that stock valuations will reset to match each firm’s operational propensity for earnings growth (i.e. each firm’s expected sustainable future free cash flow). We saw this inevitable result in each of the last two major bubbles.
Interestingly if we look at the macrocosm of the capital mix between earnings and incomes what we find since moving to a pure fiat based currency in 1971 is that while incomes are very steady as a percentage of gross domestic income (GDI), profits have been more volatile. And since the large positive inflection point of money printing in 1993, corporate profits as a percentage of GDI have gone berserk. For investors it is imperative to understand what happens to stock valuations when profits’ share of GDI collapses. In the following chart I have normalized, back to 1971, income and profits’ respective shares of GDI.
You can see income has steadily declined as a percentage of GDI while profits’ share has bounced around. But we can see that starting in the mid 1990’s profits’ share of GDI has seen massively growing bubbles and busts. This is a direct result of the temporary earnings growth scenarios discussed above. That is, rather than implementing policies that create steady long term income and earnings growth the Fed and the government have been creating policies that act as bandages. And so while we cover up the infection for short periods, eventually the infection not only reappears but spreads resulting in a continuously worsening problem for which ever more extreme bandages need to be used to cover up the problems.
Today there is an even bigger problem in that the world has been riding China’s coat tails of growth so to speak. But looking at the following chart what we find is a huge dislocation between China’s growth machine (i.e. industrial production) and the valuation of world equity markets. The dislocation really began around the time the Fed implemented Operation Twist at the end of 2011, which fed directly into QE3.
We can see a similar indicator of industrial growth decelerating by looking at collapsing materials prices which began to deteriorate around the same time that the above dislocation started in late 2011.
Despite now hearing fewer and fewer industry ‘pros’ shouting their euphoric calls for 20 year bulls we still get a constant barrage of delusional analyses. We continue to hear about a strong job market when the opposite is true. U6 (i.e. the truest official unemployment figure) remains well into the double digits. As reported today by MarketWatch, labour cost index is at its lowest growth rate since 1982 and the U.S. has gained only an average of 208,000 jobs a month this year, down from 260,000 in 2014, a 20% decline YoY. Those are the real facts and those are in the face of the lowest labour participation rate since the 1970’s and the highest number of people on government subsidy programs on record.
In short, the last 20 years has been nothing but bad policies attempting to cover up the results of previous bad policies creating a need for more extreme policies to cover up more extreme resulting fundamental problems. This is clearly depicted in the data. The end result is that global growth has deteriorated steadily now for the past 6 years to its lowest long term trend line in modern history, now below 2%.
Like the chicken and the egg, economic output and incomes are inherently intertwined.
Be prepared for the now imminent equity valuation reset. It is true the Fed now has the ability to manipulate the market well beyond anything we’ve ever seen before. However, it is also still true that when the bursting bubble achieves full momentum the Fed will be helpless to stop it. While the Fed feels increasingly omnipotent they will once again learn, that while natural laws can be bent, they cannot be broken.
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Just finished watching The Day After Tomorrow this evening (I'm on European time).
Hell of a metaphor for what's coming our way IMO.
I am eating a sock while I read this...
not your beat-off bag, I hope.
Nothing can stop "reptile" power!!
Even by zh standards this is a lot of 'just-around-the-corner everything is about to collapse completely - check these charts!!!!' articles for one weekend.
Stock Market is now officially a ZOMBIE.
So is 60% of the population...
;-D
i love zh
but how many of these charts have we seen since late 2011 or so after that last debt ceiling crash that august or whatever it was
The FED's move from omnipotent to IMPOTENT is taking a little longer than expected.
But in the famous words of Paul S and Art G....Aaaaaprilllll....come she will.....
And how did that song finish?
Septemberrrrr I will remember......
I hope it's a good remember september....
What? You can't see it? You can't see that this bubble is 30% bigger than the 2008 bubble? You can't see the serial bubbles that crush more and more dreams and all those weekly or bi-weekly "retirement" contributions get raped by Wall Street AGAIN and this is AFTER $11+ Trillion of .gov gravy slathered on Wall Street and the elites since 2008?
The South Seas Company was a sure thing, as were Black Tulips, and the roaring 20's were never going to stop.
Adjust your deck chair on the Titanic my friend, or your observation seat on the Hindenburg.
It is not a matter of IF but WHEN and we are at the 7 year cycle peak right now.
stick a sock in it...I heard that somewhere.
Hope you have plenty of mustard and it was a clean one.
I guess we're off like a herd of turtles...
Don't forget to pack your shellphones, it's going to take a while...
:-) Excellente...thanks for the laugh...
The irony is that you're saying this to an audience of creationists & climate "skeptics", who are immune to the notion of evidence.
does this mean reality TV shows will be cancelled?. Sheeples want to know
Not to worry, that will be the very last thing they'll cancel. Panem et circenses.
it may not be on TV, but Reality is going to hit the Sheeples right upside the head. It wil be right there in your living room and you won't need a TV to see it.
I cannot tell you the answer to your question for I know nothing about this sheeple shit you speak of. Reason being is that a couple of years ago I watched one of those reality TV shows once for about five minutes or so and turned the stupid shit off.
Anyway, thats the reason why I can't answer your question. I apologize in advance for not possessing the knowledge required to supply you with an earnest answer to your request for information regarding this issue.
I agree with ALL of this excellent analysis EXCEPT that last claim.
Why can't the Fed remain the buyer of last resort with it's unlimited fiat funds and support the market indefinitely?
Maybe this unusually(!) flat topping out is what we are seeing right now and will continue to see... until inflation provides "natural" support.
Loss o' confidence, that's why.
And it's beginning to happen already.
you realize what you are saying? Fed buyer of last resort will eventually end up owning every share of every company in the US. How will that work for ya?
Ive had this conversation with a lot of people and surprisingly most get it. Money from nothing and your corporations for free. Dont forget the BOJ is buyinv US stocks with freshly printed Yen, the ECB is at it too.
Just remember there is only one central bank
Its not money for free, its money at the expense of every other holder of USDs.
CONfidence in those will plummet.Hyperinflation is a political event,not economic,
Sell Mortimer sell.
Inflation is an economic process, hyperinflation is a psychological event.
There is an interesting twist to this that I have not heard much discussion about. That is if we can have fiat currency, why can't we have fiat debt. I suggest that when the bubble begins to deflate, the debt numbers will be just as manipulated as the rest of the financial numbers.
Tra la la la,,, la la,,,
;-D
we already do have fiat debt.
that's what the us dollar is - it's a debt instrument. the dollar says "federal reserve NOTE". note means an obligation, as in, an instrument of debt.
prior to 1971, the dollar was backed by gold and you could turn in your dollars for gold.
now, it's backed by...well, just trust us, you know we're good for it!
"Fed buyer of last resort will eventually end up owning every share of every company in the US."
I doubt it would ever get to that point as they can also be the seller of last resort capping the market on the upside... but what is the problem exactly with that?
its actually quite ingenious. Nationalisation piecemeal, by stealth
Don't most crashes / paradigm shifts in history happen when most people didn't have a clue it was coming? Honestly, I think a lot of people that pay attention and critical think can see the serious shit storm a mile away and it makes me wonder when/how this will ever happen with so many people aware it is coming. I have this suspicion that the moment I convince myself I have been wrong the last 7 years, that will be the moment the wheels come off.
Historically yes, but you probably spend a lot of your time on sites such as this one. We are but a small few in the grand scheme of things. That's the beauty and curse of the internet, it makes the world seem smaller yet it is not. Most people can't see the shitstorm headed our way, they are too busy watching the bachelorette, posting on facefart, taking selfies, fucking with a tablet yet wondering why they are so fat. Really, even though it would be anecdotal, hell just start up a conversation with 10 people you know and ask them about such as this. They wouldn't have a clue what you are talking about. In fact, less than a minute later they'd want to talk about "bradygate" and would think you are some kind of weirdo. We are the smallest of the minority.
You might want to entertain the idea they are over there somewhere...saying the exact same thing about you.
Correct. Here's another proof of this. Head over to reddit and do a random. You'll see how many forums there are for utterly inane garbage. We are a tiny minority.
https://www.reddit.com/r/random/
After traveling around this summer to many rural areas in the country, I have to agree with these comments 100%. Most people have absolutley zero idea what is going on. If you try to talk to them about news they don't know or is underreported, or finance and economic hisotry beyond the most obvious well-known facts, they think you're nuts.
There are a few smarter people I've had luck with, talking about 7-year economi cycles, the huge amount of debt, and so on. But most either don't want to hear or can't begin to understand.
I'm expecting some kind of "shock and awe" events in September, things to panic and numb the masses, something that can be blamed for the stock market crash. No idea what it might be -- either false flag terrorist attack, some kind of "Natural" disaster, I don't know. But it will be something the stupid masses will be able to latch on to.
It's a mechanical thing that eventually leads to a panic. We're just ahead of everyone else. Most folks are debt slaves and are trained to welcome a little inflation. The US debt went form $400 Billion in 1971 to $1 Trillion in 1981. It went from $5 Trillion to 9 under GWB. Then from $9 to 18.25, so far, under BHO with over a year to go($20T by inauguration?). Now, it's larger than GDP. That's when things get dicey. The collapse starts slowly then accelerates exponentially. They will print till they can't, like Venezuela, Mexico, Argentina, etc.
https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
When I have sold my gold, that's when the wheels come off. You all better hope that I don't have to sell.
"Why can't the Fed remain the buyer of last resort with it's unlimited fiat funds and support the market indefinitely?"
When they think they and their cohorts can make more money on the way down.
Because financial markets ultimately govern capital allocations to thr real economy of production. It doesnt matter how much money you have, if there ain't no tuna fish at the deli you can't eat no tuna fish sandwich.
Here are some more signs of a coming recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
i clicked on one of your links and, sadly, the first thing i read is:
"Recessions occur every 4 to 8 years in a society with capitalism and little regulation. And since the last one was in 2008…."
not at all! the 2008 recession came as a result of the bursting of the housing bubble.
what caused the housing bubbble (and before it, the dot-com bubble)?
that's right, an expansion of the money supply by the fed.
now, how can you possibly say that there is capitalism and little regulation, when the very money supply that underlies all asset prices, as well as interest rates, are manipulated by the fed?
do you understand that capitalism is free trade, without government intervention?
we don't have capitalism! we have cronyism / corporatism, it is an incestuous merger of corporations and government, where government bureaucrats reward their friends in the private sector, and pick winners and losers, and create barriers to free trade that benefit their friends (campaign contributors) and harm their enemies.
Maybe part of the problem is the fucking growth of the fucking financial sector in the past 15 years?
non-contributing fucks don't know how to make anything, don't produce anything - just derive profits now from trading around future promises to pay.
Not to put to fine a point on it, but the financial sector is a tumor on the increasingly wide ass of the american household.
Sooner or later you run out of other people's credit.
Whatever you say, Thad.
Theres been a post like this every week since April 2009
I find your lack of faith disturbing. [/Darth Vader]
There's a sale at pennys
-Johnny
the author should stop sniffing glue:
...the Fed will be helpless to stop it.
That scene never gets old
https://www.youtube.com/watch?v=m0XuKORufGk
Think you have seen massive QE so far?
You haven't seen anything yet.
The Fed has a limitless balance sheet when they don't give a rat's ass about inflation.
When they start that QE on steroids massive printing you are talking about (they will) they will go to sell the debt and all countries will say "no hable englase". No buyers of our debt publicly announced will cause lots of ickey things. Confidence will be given a burial in the toilet.
Japan is a prime example. There are periods in trading where there are simply no buyers on the longer term JGB's...except of course the BoJ who simply buys them all. That's our future.
I peed my pants.
So should I be prepping for a significant market decline (bad) or an economic collapse (worse)? Will one necessarily lead to the other?
You should be prepping for social unrest. Have you seen the crap that WMT (another TLA) is pushing. It's shit on a biscuit. I threw in the towel on Walmart in 2010. When the FSA has to eat socks that aren't even a mouthful of lint, then the fireworks will start...
;-D
I agree that social unrest is a big concern. People are wound really tight these days, and that's in all areas. I would not want to be in a large urban area where my impression is there are many that have absolutely no moral standards and will stop at nothing to get what they want or need. Then they throw in the Muslims of America in rural areas. We've been set up.
Ya, and Black Hebrew Israelites are in my hood now.
Rural Counties, able to grow food, with sufficient water for life, strong Sheriffs and armed US citizens, will be the best bets for surviving the economic storm.
I live exactly square in one of these rural areas you speak of. I'm trying to sell my home and get the fuck out of here.
Why?
Every one of my neighbors - on all four sides of me... are preppers.
Get this: All of them... Every one of them possess machine guns and are ready to shoot anyone at a moments notice. They talk about who they are going to kill every time I see them or talk with them.
I feel perfectly safe with the knowledge there are nervous obsessed people living on all four sides of me with machine guns who have openly expressed their intent of murdering anybody they see.
Christ. I built a home out here 70 miles from anywhere. We were alone and we had some peace. 70 miles away from anything and then THEY started showing up... one by one.
after it REALLY gets tough, they'll be shooting at each other for supplies...
Thailand is cheap.
https://www.youtube.com/user/retirecheapjc
Markets won't be allowed to fall much at a time due to 'technical' difficulties. They used to be called circuit breakers. The economy, around here, has been in slow motion collapse since 2000, with a small bump 10 years ago. Now, 20-something males work in fast food, something that used to be strictly teenagers. They are overseeing the US decline into the 3rd world.
Too much information for this brain..but it appears that an avalanche is coming..we just don't know what snowflake is going to fracture and cause the slide...
People of this blog, and citizens of earth, Please go home and love yourselves and your family. This blip, financial heartburn, is manufactured to the "Nth" degree. Know that banks and credit unions are prepared to weather the turbulence and pain of this coming flush. Give it 2 weeks and life will get back to normalcy... Go party for four weeks...
So, ZH charts are "truth" and Fed charts are "lies". ZH has $27 and the Fed has a $zillion.
Really?
When All the Lights Go Out
The Perversion is in normal business and financial cycles we should have seen a flattening out period in 2009 forward for S&P 500 adjusted earnings per share (blue line), S&P Price level (green line).
That is the Manipulation.
IMV that is not capitalism at all.
But the USA keeps telling me that the USA must save the world Economy and is responsible for the lives of most of the planet... and that is the risk of raising rates and not engaging in QE.
Fear Tactics.
Of course that is why we spend $10s of Trillions on National Security and Superpower Status and have married our biggest Corporations.
My industry has been a perfect manifestation of the authors assertion that increasing profits have been coming from short term focus on cutting costs rather than increasing top line revenue.
This is a cancer in American business driven by banksters with no regard for the long term health of their aquisition companies aka no CAPEX. The continuous pillaging of American businesses by financial whiz kids will not end well.
Events can happen anytime. If it is an event which the PTB control it always happens by surprise so they can maximize the benefit to the government. Think bank holiday or devaluation (ask a Mexican who was in Mexico in the mid 90s.
Lots of reptile comments to this article. I figure that that is because everyone realizes that at the end of 2011 the FED jacked in their software connected to infinite fiat so none of this old type of thinking means anything when compared to eating your beat off socks.
Interesting waiting for what happens next.
Patience, My friend\
Wising~Up
Having the power of discerning and judging properly as to what is true or right; possessing discernment, judgment, or discretion.
Knead moar charts. Charts are like cowbells, you can never have enough of them.
You morons don't understand something.
It's not up to me, you or the Fed.
We don't decide shit.
What's to stop stupid bipeds (i.e. you) from accepting undefined electronic digits as legal tender for their REAL and valuable goods and services NOW?
And continue investing and "saving" them in the stock market?
The answer is, nothing.
Your logic or knowledge is not the meaning nor the foundation of this world.
When you think you are God,
You are liable to find out that
You
are
not.
Dead Kennedys - Forest Fire
https://www.youtube.com/watch?v=y8v3F1n8E-c
the problem is that earnings do not drive market prices up, speculation/gambling aka"investment" does.
Any correlation between earnings and market prices is just coincidental.
it doesnt matter where the money that drives markets up comes from, the market is central bank tool used to funnel new money into circulation, it is a corporate welfare mechanism, and the fed has always been the primary driving force behind equities.
Moar chart Theater of the Absurd.
Feds will do a PBOC and buy up the entire market to prevent a crash. Bullard did it with jaw-jaw. When mega-intervention hits, shorts will have a Bad Day with a Black Rock just like the dinosaurs -- disappeared and digging their own mass graves.
It's a lot easier to just stack silver than to short this market. And by the time you are finally right they'll just change the rules and steal your money anyway. Shorting in this market is a sucker's game.
The entire American rich and elite class are highly educated morons. They all—every last one—deserve to have their heads spiked onto pikes ringing the Washington, D. C., beltway.
What we do know: the government media will be blaming hackers when the next financial market collapse arrives.
Go long "chinese" hackers and ride the National Security State bubble to 'peek' prosperity.
Good article, except the conclusion. The federal reserve is now so utterly on the hook for any collapse, they will print 100 quadrillion bucks if necessary, and buy whatever is necessary to pretend "our plans are working". And they will likely do so without reporting what they did, or increasing what they CLAIM is their "balance sheet". Every last pretense of honesty is permanently gone.